The Family Limited Partnership has been described as the "Swiss
Army Knife" of estate planning.
That's because this one tool performs so many valuable functions!
In a Family Limited Partnership, senior family members (i.e.
parents or grandparents) contribute assets to a Limited Partnership in
exchange for a small General Partner interest with management and
control rights and a large Limited Partner interest with
no management rights. Junior family members may
also contribute assets as well. The senior family members then can give all or a
portion of the Limited Partner interest to their children and
grandchildren or trusts for their benefit.
Here are some of the advantages that a Family Limited Partnership can
It may allow senior family members to transfer value to their
children (and thus removing it from their estates for federal estate tax
purposes), while retaining a certain degree of control over
partnership investment decisions. The junior family members can
later be given control over investment decisions at such time as the
senior family members determine is appropriate. Control over
partnership distributions can also be withheld from the junior family
members as well, but under recent case law, it appears that it may be
advisable not to leave such control in the discretion of the senior
family members alone.
Instead of having numerous brokerage accounts for each child or trust
for a child, there can be just one brokerage account held by the
partnership, and the children or trusts for children can own partnership
interests. This may help save on account maintenance fees.
Transferring of out of state real estate to a partnership can avoid
ancillary probate upon a partner's death. Probate is avoided
entirely if the partnership interest is held in a trust.
Unlike gifts of cash or securities, all the child has is a Limited
Partner interest. The child can't spend it. If the child has
creditor problems, all the creditor can get under the laws of most
states is a "charging order" which simply provides that if and
to the extent that any distributions are made from the partnership to
the child, that distribution would have to be paid to the creditor until
the debt is satisfied. However, the partnership doesn't have
to make any distributions. In addition, while the charging order
is in effect, IRS Revenue Ruling 77-137 may possibly be used to argue that
the creditor has to pay income taxes on the child's share of the
partnership income, even if the income is not distributed.
Typically, this permits the child to settle the creditor claim for
significantly less than otherwise may be possible.
partnership agreement can contain a mediation and arbitration provision
to provide a mechanism for resolving intrafamily disputes over
partnership management issues. It can also contain a right of
first refusal provision to prevent unwanted third parties from becoming
partners in the partnership.
If the Limited Partner interest is contributed to a trust
for the benefit for the child rather than outright, which is
generally recommended, the Partnership assets are doubly protected by
the charging order protection and the spendthrift trust protection in
Because of the lack of marketability and lack of control inherent in a
Limited Partner interest in a limited partnership, valuation
discounts may possibly apply for estate and gift tax planning
purposes. The availability and amount of the appropriate discount,
if any, would need to be evaluated on a case-by-case basis and the
services of a professional appraiser are strongly recommended.
If the partnership is not conducting an active business in Florida,
there is generally no reason that it needs to be organized in Florida.
While the Florida Statutes regarding limited partnerships are generally
favorable with respect to asset protection and valuation discounts, the
initial filing and annual maintenance fees paid to the state are much
higher than those in other states.